Switzerland’s largest bank, UBS AG, declared having been hit by $2 billion in losses because of a unauthorized trading carried out by a rogue trader, as a result of which, the bank has said that their third-quarter results are likely to be unprofitable.
Still in the process of recovering from massive losses the bank suffered because of bad credit bets three years ago, this announcement by UBS is yet another shock to investors and employees, raising questions and concerns regarding the safety provided by this banking leader’s risk systems.
Market analysts have put forth a number of speculations regarding the effect of this net loss that will most-likely reflect in UBS’s third-quarter results in terms of job cuts and significantly smaller bonuses for employees, in addition, of course, to anxiety among investors.
The effects of this news was evident in the fact that UBS shares in Switzerland dropped by almost 11%, on a day which saw most other stocks rise, and by 10% in the New York Stock Exchange, despite the bank officials efforts towards pacifying and reassuring investors.
2007-2009 Financial Crisis and Post that…
The recession and related global financial crisis that took place over the 2007 – 2010 period impacted UBS massively, with the bank announcing 11,000 job cuts and writing off approximately $50bn of mortgage related assets, while also having to shut some trading units.
Following these lows, UBS adopted some aggressive strategies towards restoring its investment banking related revenue, cutting down on outflows at its private bank by investing heavily in the businesses and tackling a U.S. tax probe that had prompted clients to leave.
As a result of the initiatives related to investment banking, UBS had seen some sort of a turnaround. However, the targets set by UBS after this resurgence were not met by the company because of new global and Swiss regulations.
The outlook for UBS was further slowed down by a slowdown in client activity this year that resulted from volatile markets, alongwith a number of bankers walking away because of a reduction in the bonus packages.
This latest news of UBS losing $2 billion because of rogue trading is being regarded by many as signaling a return of bad times for UBS.
The Suspect: Kweku Adoboli
31-year old Kweku Adoboli, a London UBS employee, is prime suspect in the roughly $2 billion loss suffered by the bank. Mr. Adoboli was arrested by London police on Wednesday night, after the bank notified law authorities of the losses.
Mr. Adoboli is reportedly a trader in London uses UBS’s money to bet on financial instruments related to exchange-traded funds, which allow clients to trade securities that track the performance of broad indexes.
Mr. Adoboli has, for five years, worked on a desk that trades large baskets of securities or allows clients to bet on them through options or other instruments. According to the Wall Street Journal, Mr. Adoboli’s desk specialized in so-called Delta One products that allow banks and investors to track underlying assets or indexes.